Landl & Company v.

Metropolitan Bank (2004)

G.R. No. 159622
July 30, 2004
YNARES-SANTIAGO, J.
TOPIC IN SYLLABUS: Remedies Available (Trust Receipts Law) entrustee liable for deficiency
SUMMARY: A Trust Receipt Agreement was entered into by Metrobank (entruster) and Landl
(entrustee) in order to secure an irrevocable letter of credit. Landl failed to pay the debt it owed
to Metrobank and initially failed to deliver the goods under the TR upon maturity. Subsequently,
and upon demand, Landl delivered the goods to Metrobank these were then sold under auction
to Metrobank as the highest bidder, but for an amount that did not fully cover the debt due.
Landl refused to pay the balance.
[Divina, p. 20] As provided under Sec. 7, P.D. No. 115, in the event of default of the entrustee,
the entruster may cancel the trust and take possession of the goods subject of the trustor or of
the proceeds realized therefrom at any time; the entruster may, not less than five days after
serving or sending of notice of intention to sell, proceed with the sale of the goods at public or
private sale where the entrustee shall receive any surplus but shall be liable to the entruster for
any deficiency. This is by reason of the fact that the initial repossession by the bank of the goods
subject of the trust receipt did not result in the full satisfaction of the entrustees loan obligation.
PROCEDURAL ANTECEDENTS: Petition for Review on Certiorari (R45)
FACTS:
Landl was in the business of selling imported welding rods and alloys.
17 June 1983: Landl opened a Commercial Letter of Credit (LOC) with Metrobank
($19,606.77 or P218,7332.92).
o Landl put up a marginal deposit of P50,414.
o Two Directors of Landl (Llaban and Lucente) executed a Continuing Suretyship
Agreement, up to P400k excluding interest.
o Lucente also issued a Deed of Assignment amounting P35k in favor of Metrobank.
o This LOC was to be used purchase welding rods and electrodes from Perma Alloys
(NY, USA).
Metrobank issued an Irrevocable LOC for Landl.
o Metrobank also required the execution of a Trust Receipt (TR), in an
amount equivalent to the LOC.
o Under the TR, Landl would hold the goods in trust for Metrobank.
23 November 1983: Landle defaulted on the payment of its obligation to Metrobank AND
failed to turn over the goods.
o 24 July 1984: Metrobank demanded that Landl (as entrustees) turn over the
goods subject of the TR.
o 24 September 1984: Landle turned over the goods to Metrobank.
31 July 1985: the goods were sold at a public auction for P30k (NOTE: does NOT cover
the entirety of the balance owed by Land) to Metrobank, as the highest bidder.
o Landl failed to pay the balance owed upon demand by Metrobank.
Metrobank filed a complaint for sum of money against Landl and its directors
[Cebu RTC]
21 March 1997: RTC decided in favor of Metrobank and ordered Landl, et al. to
pay P292.2k (P292,172.23) plus interest.
Landle, et al. filed an appeal with the CA.
13 February 2003: CA affirmed in toto the RTC.
ISSUES:
1. Can an entruster which had taken actual and juridical possession of the goods
covered by the trust receipt may subsequently avail of the right to demand from
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the entrustee the deficiency of the amount covered by the trust receipt? [See:
Sec. 7, PD 115]
PETITIONERS ARGUMENT:
1. When the entrustee fails to settle his principal loan, the entruster may choose
between two separate and alternative remedies: (1) the return of the goods
covered by the trust receipt, in which case, the entruster now acquires the
ownership of the goods which the entrustee failed to sell; or (2) cancel the trust
and take possession of the goods, for the purpose of selling the same at a
private sale or at public auction.
The availment of one bars the availment of the other.
Under the 2nd remedy, the entruster does not acquire ownership of the goods thus,
he is entitled to the deficiency.
However, under the 1st remedy the actual return of all the unsold goods
completely extinguishes the liability of the entrustee.
RESPONDENTS ARGUMENT:
1. [Note: not expressly discussed.]
HELD:
1. YES.
The 2nd paragraph of Sec. 7 provides a statutory remedy available to an entruster in the
event of default or failure of the entrustee to comply with any of the terms and conditions
of the trust receipt or any other agreement between the entruster and the entrustee:
o the entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time.
o the entruster in possession of the goods, documents or instruments may,
on or after default, give notice to the entrustee of the intention to sell,
and may, not less than five days after serving or sending of such notice,
sell the goods, documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds of any such
sale, whether public or private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking, keeping and storing the
goods, documents or instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency.
The stipulations in the TR were near-exact reproductions of Sec. 7, PD 115.
o Right of repossession, subsequent sale at public auction: rights available
upon default conferred by statute and reinforced by contract.
SC: (1) The initial repossession by the bank of the goods subject of the trust
receipt did not result in the full satisfaction of the Landls loan obligation the
full turn-over of the goods does NOT suffice to divest the entrustee of its
obligation to repay the principal amount of its loan obligation.
o Possession cannot be considered as payment of the loan secured payment would
only legally result after foreclosure, sale, and application of the proceeds thereof to
the loan obligation.(PNB v. Hon. Pineda)
o Since the entruster is not the factual owner of the goods, the entrustees cannot
justifiably claim that because they have surrendered the goods to entruster and
subsequently deposited them in the custody of the court, they are absolutely
relieved of their obligation to pay their loan because of their inability to dispose of
the goods. (Vintola v. Insular Bank)
SC: (2) The 2nd par. of Sec. 7 expressly provides that the entrustee shall be liable
to the entruster for any deficiency.
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NOTE: The SC, however, ruled that there was an error in computing the amount of the
deficiency due.
o There was no showing that the proceeds of the auction sale and the marginal
deposit were applied to the loan which is pertinent for determinging interest and
other charges.
o No service charges were stipulated, thus none should have been granted; no basis
for computing attorneys fees by compounding the 10% per annum instead of
imposing it on the total amount due.
NOTE: The SC also clarified that as co-signatories of the Continuing Suretyship agreement,
Lucente and Llaban bound themselves solidarily.

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